How do the global equity and bond markets affect Islamic and conventional banks? A comparative cross-country analysis using multivariate regression quantiles

Using the multivariate quantile autoregression technique, we examine how equity returns of Islamic and conventional banks are affected by shocks to major financial indices such as the DJUSI index, the MSCI World Index, the VIX index and the United States 10-years Treasury bond interest rate. We compare the stability of the two banking systems to financial risk spillovers at the global and regional levels based on data from 16 countries for the period after the 2008 crisis. The empirical findings suggest that Islamic banks' equities have weaker codependency with major equity markets than conventional banks at the global level while Islamic banks' codependency with the 10-years US Treasury bond rate tends to be stronger than conventional banks indicating the sensitivity of Islamic banks to global interest rates. The empirical results also reveal that there does not seem to be any significant difference between stock price reactions of Islamic and conventional banks both at the regional and global levels in response to shocks to major financial indices. Regarding regional comparison of Islamic banks only, we find that Islamic bank performance does not vary much across heterogeneous geographic regions.

Automated summary

This study uses the multivariate quantile autoregression technique to examine the impact of shocks to major financial indices on the equity returns of Islamic and conventional banks. The results suggest that Islamic banks have weaker codependency with major equity markets but stronger codependency with the US 10-years Treasury bond rate compared to conventional banks. There are no significant differences in stock price reactions between Islamic and conventional banks in response to shocks to major financial indices at both regional and global levels.